Unintended Consequences

This post is from the Monday Morning weekly Newsletter. You can join Here. The Bank of Canada is set to make its first interest rate decision of the year this Wednesday. While market odds expect the central bank to remain on hold, the outlook is anything but set in stone. The Bank of Canada remains one of the only major central banks that hasn’t aggressively eased monetary policy over the past year, and with economic data beginning to sour, the pressure is certainly mounting on Governor Poloz. On one hand, the economy is slowing, on the other, all signs point to further inflation in the housing market. National sales were up 22.7% year-over-year in December, a big jump from a disastrous 2018. The reality is, home sales continue to hover above the ten year averages, and in most major markets, prices continue to rise. This pushed the national home price index higher once again, up 3.5% from last year and clearly trending higher. However, the real story here is what appears to be the unintended consequences of prolonged real negative interest rates. Canadians are hoarding houses, opting not to sell. In a world where safe assets yield next to nothing, think savings accounts, GIC’s, bonds, Canadians are parking their money in real estate. On a national basis, December saw the second fewest new listings in the past decade, leaving the months of inventory on the market at its lowest level since 2007. On a sales to new listings basis, market conditions haven’t been this tight since 2004. Think about it, Canadian housing is on a near thirty year bull market, entrenching a self-fulfilling belief that prices always go up, so why sell? Meanwhile, any sudden correction in the market is being met with ample liquidity from global central banks. Under normal circumstances, when asset prices get too hot, central banks raise interest rates and put an end to the party. Instead, we are most likely facing a scenario where the Bank of Canada follows suit and cuts rates in 2020, chasing their official mandate of 2% inflation, despite the obvious repercussions. More on this Wednesday.